He said the sector was at a "turning point" with the emergence of new banks such as Virgin Money, Metro Bank and Tesco but said if "real change" is not seen, a "radical approach" must be considered.

The OFT chief executive said he was prepared to hand the sector over to the Competition Commission and warned the industry could face the same outcome as airports operator BAA - a forced break-up.

Mr Fingleton said: "A step change is needed in the banking sector. Going forward we need to see evidence which demonstrates that the market dynamics of entry and switching are sufficient to drive stronger customer-focused competition.

"Without this the obvious question is whether the concentrated market structure of UK banking is the problem. And one way to consider this question is a reference to the Competition Commission."

Mr Fingleton said the lack of competition had made it harder for those banks who do offer better deals to increase their market share.

"For too long, competition in the banking sector has not functioned well," he said.

The ICB last year recommended that people and businesses wanting to change banks should be able to switch accounts within seven days.

Problems with changing a bank account were one of the long-standing competition issues in UK retail banking, the ICB said, with the largest four UK banks having 77% of personal accounts and 85% of small business accounts.

To alter this, the Commission has recommended that as well as transferring an account within seven working days, the banks will also have to provide "seamless redirection" of direct debits and credits from old accounts to new ones for more than a year at no cost.

The ICB reforms received the full backing of Chancellor George Osborne, who pledged to implement them in full by 2019.

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